Comparison of Business Structures Law and Legal Definition

What is the difference between a corporation and an LLC?

These entities are similar in that they provide protection against liability for their members/owners. Both corporations and LLCs are formed according to state law. Corporations are owned by shareholders and managed by a board of directors and officers. An LLC is owned by one or more members and may have one or more managers. Federal tax obligations differ. An LLC is taxed as a partnership by default. That is, the tax is paid by the owners rather than the company itself. For the LLC to be taxed separately from the owners, one must choose this election (8832 form). A corporation is taxed as a separate entity by default. For the corporation to be taxed in a similar fashion to a partnership (an “S” corporation) it must chose this election (2553 form). An LLC may offer increased asset protection when a business owner suffers a personal lawsuit. It is easier for a legal opponent to seize corporate shares than LLC membership. Thus, an LLC is often favored for use in owning investment real estate.

How are corporations different from partnerships, sole proprietorships and LLCs?

Unlike corporations, partnerships and sole proprietorships do not provide limited personal liability for business debts. This means that creditors of those businesses can go after the owners' personal assets to collect what's due. However, organizing and operating a partnership or sole proprietorship is much easier than forming a corporation, because no formal paperwork is required.

A limited liability company (LLC), on the other hand, does offer limited personal liability, like a corporation. And while formal paperwork is required to form an LLC -- also like a corporation -- running an LLC is less complicated. LLC owners do not have to hold regular ownership and management meetings or follow other corporate formalities.

In addition, corporations differ from other business structures in the way they are taxed. The corporation itself must pay corporate income taxes on profits -- that is, whatever is left over after paying salaries, bonuses and other deductible expenses. In contrast, partnerships, sole proprietorships and LLCs are not taxed on business profits; instead, the profits "pass through" the business to the owners, who report business income or losses on their personal tax returns.

What is the difference between a general partnership and a limited partnership?

Usually, when you hear the term "partnership," it refers to a general partnership -- that is, one where all partners participate to some extent in the day-to-day management of the business. Limited partnerships are very different from general partnerships, and are usually set up by companies that invest money in other businesses or real estate.

While limited partnerships have at least one general partner who controls the company's day-to-day operations and is personally liable for business debts, they also have passive partners called limited partners. Limited partners contribute capital to the business (investment money) but have minimal control over daily business decisions or operations.

In return for giving up management power, a limited partner's personal liability is capped at the amount of his or her investment. In other words, the limited partner's investment can go toward paying off any partnership debts, but the investor's personal assets cannot be touched -- this is called "limited liability." However, a limited partner who starts tinkering with the management of the business can quickly lose limited liability status.

Doing business as a limited partnership can be at least as costly and complicated as doing business as a corporation. For instance, complex securities laws often apply to the sale of limited partnership interests. Consult a lawyer with experience in setting up limited partnerships if you're interested in creating this type of business. What are the differences between a partnership and a limited liability company?

When two or more people go into business together, they've automatically formed a partnership; they don't need to file any formal paperwork. By contrast, to form a limited liability company (LLC), business owners must file formal articles of organization (sometimes called a certificate of organization) with their state's LLC filing office (usually the secretary of state or department of corporations) and comply with other state filing requirements.

Aside from formation requirements, the main difference between a partnership and an LLC is that partners are personally liable for any business debts of the partnership -- meaning that creditors of the partnership can go after the partners' personal assets -- while members (owners) of an LLC are not personally liable for the company's debts and liabilities.

There is one similarity between LLCs and partnerships, however. They both offer "pass-through" taxation, which means that the owners report business income or losses on their individual tax returns; the partnership or LLC itself does not pay taxes.